Cointegration between the European Union and the selected global markets following Sovereign Debt Crisis

  • Received July 3, 2017;
    Accepted December 13, 2017;
    Published January 17, 2018
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  • Article Info
    Volume 15 2018, Issue #1, pp. 35-45
  • Cited by
    6 articles

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This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License

The purpose of this paper is to provide an analytical analysis of cointegration between Europe and the other significant trading partners, namely US, China, Japan and Australia, for the period from January 1, 2010 to December 30, 2016. This captures the impact of the sovereign European debt crisis and the Greek crisis. A range of parametric techniques were adopted including Johansen cointegration analysis, Vector Error Correction Model and Granger causality. The results of the crisis Granger causality test during the European sovereign crisis implies the highest influence to be that of the US and Japanese stock market over the other four markets. Overall, found that the Asia-Pacific region plus the US stay closely related to each other, while European countries influence all the studied markets except each other. For the post-crisis sub-period, the Granger causality is slightly different. It is observable that the UK and Germany are influencing all the markets. This is probably due to the recent Brexit referendum outcome and potential consequences not only for the EU, but also for the rest of the world too. Overall, the Granger outcome shows the dependence between Europe and other global markets, but there is no European interdependence during the sovereign debt crisis period. It may be concluded that there is a separation of Asian markets from the European markets and even though cointegration exists, the relationship is rather weak.

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    • Figure 1. Index level and return series
    • Table 1. List of countries and market indices in the study sample
    • Table 2. Unit root tests with a breakpoint (ADF) on index levels and first differences
    • Table 3. Johansen cointegration rank test results
    • Table 4. Normalized cointegrating vectors
    • Table 5. Granger causality test for returns, crisis sub-period
    • Table 6. Granger causality test for returns, post-crisis sub-period